Droves of investors are stampeding into equities in India drawn by the best bull run in nearly a decade, powering benchmark indices to multiple record highs over the past two months. The rally has now caught the eye of ordinary people, who have rarely followed stocks, as well as the rich and institutional funds to jump into the bandwagon in the hope of making windfall gains.

This was more than evident in an initial public offering by Central Depository Services Ltd (CDSL), which this week received bids for more than 170 times the shares on offer. The component for the creamy layer of investors or high net worth individuals (HNIs) was oversubscribed more than 500 times. The company, which operates India’s second-largest depository for securities, is primarily owned by the Bombay Stock Exchange and a clutch of state-run banks.

“India has been definitely on the radar at the top most level for investors and this is not coming purely from a few things looking okay,” Sumit Jalan, head of Indian equity capital market business at Credit Suisse, told ET Now television channel.

“Liquidity is high, macros are good, reform measures have been taken and quality of the companies coming to the market has been good. Returns have been reasonably superior for investors in most of these issuances and, therefore, IPO has emerged as a new asset class for investors at this point of time.”

Still, the sheer magnitude of excess subscription rings an alarm bell. “I believe one is sensing an element of froth,” Jalan said, specifically referring to the HNI segment.

Some of the subscriptions are coming from borrowed funds, meaning greed-driven leveraging is high and any unexpected jolt could cause ruin.

Resistance builds

Meanwhile, the secondary market is facing resistance after the record rally. Smart investors are reluctant to commit funds at high levels and are waiting instead for the market to cool down. All said there is consensus the longer term outlook is undoubtedly bullish, but for the near term there would be a correction.

The top-30 Sensex shot to a record 31,522.87 on Thursday, riding on optimism about a new goods and service tax (GST) that rolls out on July 1 and measures underway to tackle the bad debts problem in banks. However, it could not hold on to the level and back tracked to 31,138.21 by close on Friday, still up 0.3 per cent for the week.

At its peak, the closely tracked benchmark had risen 18.4 per cent in 2017, making India one of the top performing markets in the world this year.

The 50-share Nifty, which hit an all-time high of 9,709.30 on June 6, was under pressure and drifted to a four-week closing low of 9,574.95, down 0.1 per cent over the week.

There could be more pullbacks in both the indices in the coming week as the GST is initially expected to cause some disruption. The progress of monsoon, which is crucial for the farm sector and rural incomes, also will be on the radar. So far the showers have been below par though the forecast is for normal rainfall through the four-month season.

Silver line

Minutes released by the central bank showed its Monetary Policy Committee (MPC) voted 5-1 to keep interest rates unchanged at its last meeting, the first time there was a split since the panel was empowered about nine months ago to decide on interest rates.

Ravindra Dholakia, an economics professor at India’s top management school in Ahmedabad and one of the six persons in the MPC, called for a 50-basis point cut in the repo rate, which should warm the cockles of policy mandarins in New Delhi as well as industry captains.

The political leadership has been sparring with the Mumbai-headquartered Reserve Bank of India over the direction of monetary policy, with the government arguing for a reduction in borrowing costs to help revive private-sector investment — vital to generate employment and accelerate growth.

“With divergent views on the MPC, Governor Patel’s vote is critical and in light of current conditions and his comments in the minutes, we believe he may prefer to hold out a bit longer, while shifting his tone more dovish,” economists at Goldman Sachs said in a note.

Doubtlessly, there will be greater pressure on Reserve Bank of India Governor Urjit Patel to loosen policy, probably as early as August when the MPC next meets. This is because consumer price inflation, which at 2.18 per cent in May was the lowest in at least five years, is expected to remain benign through the financial year that ends next March.

“Even if inflation bottoms out later this year, its recovery is likely to be modest,” says Radhika Rao, Singapore-based economist at DBS Group. “Apart from inflation, lower financing costs will help investment growth.”

Goldman’s India picks

Global investment bank Goldman Sachs has selected four Indian companies — one each from automobiles, financial services, pharmaceuticals and infrastructure-related — for its top Asia Stock Collection, which lists 44 equities from the continent.

“Asia is the home of Active,” the brokerage said in a report. “From Alibaba to Yili, Alps to Maruti, we go back to first principles on our differentiated, liquid and idiosyncratic stock ideas in Asia. No news, no noise, no maintenance. Just the story, the charts and the numbers.”

Maruti Suzuki, which makes every second new car sold in India, is on track to become the third-largest carmaker globally, it said, adding that world-beating profit margin and a strong pipeline in a fast-growing market makes the company a champion warhorse.

New launches and order backlog should drive outperformance, Goldman said, setting a 12-month price target of Rs. 8,029 for the stock. The blue-chip closed at 7,237.20 on Friday, up 36 per cent since the start of January after rallying 15.3 per cent in 2016.

Consistently stellar performance by HDFC Bank, the country’s second-biggest private sector lender, won a place for it in the coveted list. A favourite of foreign institutional investors, Goldman expects the bank’s market capitalisation to exceed $100 billion by 2019-20, with a potential to reach $137 billion in a bull scenario.

Setting a 12-month price target of Rs. 1,892 — the stock closed at Rs. 1,678.55 on Friday — the brokerage said the bank should benefit from a shift in market share from state-run banks.

The securities house is upbeat on Aurobindo Pharma Ltd because of its transformation from manufacturing simple generics to bigger complex drugs. Expecting 16 per cent EBITDA (earnings before interest, tax, depreciation and amortisation) growth over the next two years on new launches and margin expansion, it set a 12-month target price of Rs. 792, an upside of 18 per cent to Friday’s close of Rs. 671.35.

It also said that an enterprise value to EBITDA discount of 30 per cent to peers was unwarranted. Although US regulatory concerns were an overhang, complex launches should ramp up sales, the brokerage said.

Larsen & Toubro, the country’s leading engineering and construction firm, is set to ride the boom in government spending on infrastructure. Goldman believes the company’s execution of projects would improve and there could be additional tailwind from asset sales for the stock. It sees the share at Rs. 1,900 a year from now, up 10.3 per cent from Friday’s close.

The writer is a journalist based in India.